NEW YORK (
) -- For investors seeking international exposure to countries that have outperformed even the fast growing nations of the BRICs, Southeast Asia presents two ETF options.
Option No. 1:
iShares MSCI Malaysia Index Fund
Year to date, EWM has increased by 3.4%. Meanwhile, Brazil, Russia, India, and China, as represented by
iShares MSCI Brazil
iShares FTSE Xinhua China 25 Index
, have moved by -5.4%, +2.3%, -2.5%, and -3.2%, respectively.
Malaysia's economy grew by 4.5% in the fourth quarter from a year earlier and the governor of the country's central bank said this week that she expects the economy can expand at a 5% growth rate in 2010.
Inflation in Malaysia is low and forecast to remain modest throughout the year, and the central bank says it is ready to gradually reel in stimulus measures. This has many people watching to see if there will be an interest rate increase soon.
Malaysia's economy is export-oriented and benefits from improving economic conditions worldwide. In particular, the country is an exporter of natural gas and oil, and higher energy prices from increased global economic activity will increase profits.
Investors in EWM do not need to be too concerned with energy prices though, since the sector is poorly represented in the fund. Instead, the sector that receives the greatest exposure in the fund is the financials, which account for 31% of the ETF's portfolio.
Among the banks in the fund, the two most prominent featured are CIMB Group and Malayan Bank, each accounting for about 8% of the fund. Both have Islamic banking divisions, which are an important part of financial business models in the region since Shariah law holds great influence in the predominantly Muslim country.
Consumer goods companies represent another prominent slice of the fund with consumer staples accounting for 14.6% of holdings and consumer discretionary 12.2%. The largest holdings in the consumer goods sector are Genting, and Genting Malaysia, the parent holding company and the branch division, respectively, of a leisure and hospitality-based corporation that accounts for a combined 8.4% of EWM.
The No. 1 holding in the fund is industrial conglomerate Sime Darby, which accounts for 8.8% of net assets and has significant interests in palm oil. Last month, Sime Darby reported strong earnings for its latest quarter, as did with many other Malaysian companies that also reported well, and gave positive guidance.
Option No. 2:
MarketVectors Indonesia Index ETF
IDX, which provides investors with exposure to Indonesia, the fourth most populous country in the world, has done even better than EWM in 2010, up 4.2% year to date.
In contrast to Malaysia, Indonesia's economy relies far more on domestic consumption than exports and the total size of the economy is larger.
Indonesia was able to boast that it was one of only three G20 nations to post positive yearly economic growth during the financial crisis along with China and India. While most G20 economies were experiencing negative economic growth in 2009, Indonesia's economy grew by 4.4%, according to the CIA's world factbook, although this was a slowdown from 2008's growth of 6.1%.
The top holding of IDX is a conglomerate called Astra International, which accounts for 8.5% of the fund's holdings and has operations in the financial, industrial, and tech, sectors.
The second largest holding in the fund is Bank Central Asia. Financials account for 24.6% of the index that IDX tracks. The third largest holding a telecommunications company that is one of only two Indonesian companies traded on the New York Stock Exchange,
Materials and energy are also big sectors for IDX, accounting for 24.0% and 14.7% of the fund, respectively. These two sectors are then followed by consumer staples and consumer discretionary, which account for a combined 23.9% of IDX.
Indonesia is also hoping to get a boost in its recognition as a stable economy and a target of foreign direct investment from President Obama's visit to the country towards the end of March.
The head of Indonesia's investment agency, Gita Wirjawan, a former banker with
, is also confident that the free-trade agreement signed earlier this year with China and other ASEAN members will not hurt the country's economy. On the contrary, he said in a
story that he actually believes the reduction of trade barriers will present many opportunities for Indonesia.
Wirjawan also said in the same story that he and the rest of the government officials responsible for economic development in Indonesia could sleep for the next five years and the economy would still grow 6% a year.
From last year's performance of IDX, it does indeed look as though the economy is on cruise control. The fund advanced 200% from the end of last March to the end of 2009.
So far in 2010, IDX and EWM have led the way amongst emerging market ETFs in Asia and have even done better than funds representing the BRIC countries. Some political flare-ups could occur and have the potential to hurt growth in these countries, but this is true for most emerging markets as well as many developed markets and is extremely difficult to predict.
I see no reason why the outperformance trend of these two funds will not continue, making these ETFs a great way to diversify an international portfolio beyond the obvious choices.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owns iShares MSCI Brazil.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.